Monday, October 17, 2005

Should Petronas Subsidize Petrol?

by Datuk Mustapa Mohamed (Minister in the Prime Minister's Department)

IT would seem that whenever PETRONAS posts a profit, the public reacts with cynicism. This was indeed the case on June 30 when the corporation announced post-tax profits of RM35.5bil.

There are parties who believe that as a Government- owned company, it is inappropriate for PETRONAS to revel in its success, especially with rising fuel prices.

This sentiment is made worse by the perception that the billions of ringgit of profits made by the national petroleum corporation, was not the result of hard work, improved productivity or expert management, but merely the outcome of rising world crude oil prices.

When the Government made a decision on May 5 to reduce petroleum subsidies in stages, many urged the Government to make use of the corporation's profits to sustain the subsidies.

In reality, there are two issues that need to be understood. The first has to do with the role of PETRONAS, its management structure and its portfolio of business activities. The second relates to its links with the Government and how national finances are managed.

PETRONAS was formed specifically to protect and manage petroleum resources in a professional manner which would bring profits to the immediate generation and protect the nation's well being.

Our country is fortunate in that since PETRONAS' formation in 1974, it has been managed to the highest standards by dedicated and professional Malaysians.

From its humble beginnings as a local company, PETRONAS today is a multinational corporation with operations in more than 30 countries comprising upstream, downstream, refinery and marketing activities.

About 35% of PETRONAS' earnings now come from its international operations.

It's earnings form a substantial source of national income. Profits earned by PETRONAS are profits for the Government and all Malaysians.

For the financial year ended March 31, PETRONAS contributed RM31.2bil to the Government in the form of dividends, royalties, taxes and export duties. This amounts to more than half of its pre-tax profit of RM59bil.

On the whole, about 25% of the Federal Government's income is derived from PETRONAS, without which the Government would be denied a substantial source of income for national development projects.

The Federal Government administrative centre in Putrajaya, University Technology PETRONAS and the Kuala Lumpur City Centre have been made possible through the contributions by PETRONAS and its subsidiaries.

Since its formation, PETRONAS has contributed RM246bil to the Government. The impressive infrastructure and vibrant growth we now enjoy were partly funded through the profits earned by the corporation. How this money is spent is the Government's prerogative and has no relation to PETRONAS. However, the Government has decided that part of that money be spent on subsidies for petrol, diesel and cooking gas.

The remainder would go towards paying the salaries of civil servants and funding projects such as schools, hospitals, mosques and roads.

In 2004, the amount spent by the Government on subsidies and taxes forgone amounted to RM11.9bil. This figure is expected to soar to RM16.8bil should the retail price of petrol, diesel and LPG be maintained despite rising oil prices. At this increased sum, the subsidies would make up 60% of the national development budget.

It would seem logical that diverting PETRONAS' profits to national development projects would stand to benefit more of the people versus spending it on fuel subsidies which, arguably, only benefits those who are better off.

In addition to direct contributions to the Government, PETRONAS also subsidises natural gas used by the energy sector with contributions of RM6bil for the financial year ending March 31.

Regulated pricing for energy was introduced in 1997, when the gas price was set at RM6.40 per mbtu (Million British Thermal Unit). Despite higher international prices, this price has been maintained through subsidies from PETRONAS, amounting to RM25bil to date.

It is because of this that domestic electricity rates have been maintained at reasonable levels.

There are still those who argue that PETRONAS should return more of its yearly profits to the Government, and the money be used to increase fuel subsidies.

This argument does not take into consideration the need to preserve and manage our natural resources which PETRONAS does by reinvesting its profits in exploration, and advances in research and development.

Without the discovery of new oil wells, our national reserves will be exhausted in 19 years, while gas reserves will only last another 33 years.

Such a change in fortunes has already been seen in Indonesia, a once major member of Opec. There is perhaps another source of confusion with regard to Malaysia's position as a net exporter of oil.

Questions are often asked why Malaysia needs to import oil if we produce and export it.

There are two types of crude oil found in the world – light crude and heavy crude.

Malaysia produces light crude, while heavy crude are found in West Asia.

At this time, Malaysia houses five refineries with a combined capacity of 547,000 barrels of oil per day (bpd). Of these, PETRONAS owns three with a combined capacity of 256,000 bpd, or 47% of the total national output.

Malaysia consumes 520,000 bpd. To meet this demand we need to rely on refineries belonging to international oil companies, too. Not all our petroleum product needs can be met by the five refineries.

The oil produced in Malaysia is not solely controlled by PETRONAS but is shared with companies like Shell and Exxon-Mobil, based on shared production agreements. PETRONAS and the Government are not in a position to dictate how all our oil resources are deployed.

Like PETRONAS, these companies, too, have invested heavily to build, maintain and upgrade their refineries in order to meet domestic demand. They require viable returns in order to continue operations in Malaysia.

It is clear that the notion for Malaysian oil to be refined and sold cheaply for domestic consumption is both technically unfeasible and economically unproductive.

PETRONAS was not set up to be a cash cow for a select few but for the benefit of all.